How to Build and Maintain Good Credit: 11 Essential Steps for Financial Success
Today, your credit history impacts more areas of your life than you probably realize.
Building and maintaining good credit is essential for securing favorable financial opportunities, such as low-interest mortgages, credit cards, student loans, competitive insurance rates, and even job offers. Whether you’re starting fresh, recovering from financial challenges, or aiming to improve your credit score, the following 11 steps will help you develop and sustain a solid credit history. Follow these strategies to take control of your credit and build a strong financial foundation.
1. Choose the Right Strategy for Building Credit
Start by selecting the best strategy to build your credit. Using a credit card responsibly is a common approach, but it’s not the only option. If you can’t qualify for a card, or the ones you do qualify for have low limits and bad terms, consider alternative methods like loans, credit-builder loans, or services that report your rent payments to the credit bureaus.
A straightforward alternative for creating an impressive credit history is a loan. If you have a loan right now, you are already establishing your credit history. Student loans, mortgages, car loans, HELOCs, and many other types of loans appear on your credit report.
Get proactive in building credit. Consider taking out a credit-builder loan. These small loans allow you to establish a solid payment history that’s reported to the credit bureaus. Or sign up for a service that reports your rent payments to the credit bureaus.
2. Select the Right Credit Card
When choosing a credit card, look for one with a low interest rate, no annual fee, and potential rewards (like cash back or travel rewards). If you don’t qualify for a traditional card, consider being added as an authorized user on a family member’s card (a parent or spouse) or applying for a secured credit card, which requires a cash deposit.
Most card issuers report the activity of secondary cardholders and secured cardholders to credit bureaus. As a result, you’ll begin building your credit history once you start using the card. After using the card responsibly for several months, you may become eligible for traditional (unsecured) cards that don’t require a primary user or an upfront deposit.
3. Make Timely Payments
Your payment history makes up 35% of your FICO score. Always pay your loans and credit cards on time to avoid late fees and credit score drops. Even one missed payment can result in a significant score decrease, so prioritize paying bills by their due dates.
Even a single late payment can seriously sour your credit score, causing a drop as high as 110 points. Making timely payments a priority for every loan and credit line you have is crucial for your credit health.
4. Avoid Reaching Your Credit Limit
A common misconception about credit is that using more of the credit available to you will translate to a higher score. But following that advice will actually hurt your score
Maintain a low credit utilization ratio (the amount of credit used compared to the total available limit), as it accounts for nearly one-third of your FICO score. Keeping your ratio below 30% is recommended to protect your credit score. Once it reaches above 30%, your credit score will start to dip. The lower your utilization, the higher your credit score potential. People with the very highest credit scores have a ratio of only about 7%.
5. Lower Your Interest Rates
If you’re like most Americans, your debt is more than just the amount you’ve borrowed. It also includes the interest charges you’ve accumulated on your loans and cards.
But one surefire way to keep debt from snowballing is to slash interest rates wherever possible. First, research loans and credit cards to choose those with the most favorable terms.
Then, keep an eye out for sweeter deals over time. As your credit improves, you may have the opportunity to access even better cards or loans. Refinance your loans or transfer your card balances when it makes sense.
Finally, try simply asking for a lower interest rate on your card! One survey from CreditCards.com found that 69% of those who requested a rate decrease from their card carriers were successful.
6. Review Your Credit Regularly
Knowing where you stand is powerful. Many credit cards now provide a free peek at your credit score, updated each month. And those reports often highlight the factors that are hurting your score the most. If you focus on changing those factors, your efforts can have a significant impact on your score going forward.
But your score tells you only so much. To view the elements that go into the making of your score, you need to view your credit history report. By law, you’re entitled to three free credit reports every year — one from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Study each of them carefully to get a full picture of your credit.
7. Fix Errors on Your Credit Report
Many people assume that their credit reports accurately reflect their financial histories. But, according to the FTC, 25% of Americans have at least one error on their credit reports. Fortunately, the Fair Credit Reporting Act requires credit bureaus to fix the errors promptly.
Where should you look for mistakes? Start with the basics — names you’ve used, addresses, and personal information. Then, review the list of your credit accounts, records of payment history, and details of bankruptcies or debts in collection. If you spot something amiss in your report, notify the reporting company right away.
8. Protect Against Identity Theft
In 2018, 14.4 million people fell victim to identity theft. Accounts were illegally opened in their names, tax refunds were claimed on their behalf, or their credit cards saw unapproved charges.
Luckily, spotting problems early can give you a leg up in containing the damage. Contact your credit bureau if you suspect fraudulent activity when viewing your credit report.
And follow the FTC’s guidelines for protecting yourself. Steps may include placing a fraud alert on your credit, requesting a new number for your credit card, strengthening your financial account passwords, reviewing your billing statements and credit reports more frequently, and possibly working with a credit monitoring company.
9. Keep Old Credit Lines Open
Building a solid credit history does take time. But time works to your advantage. That 30-year mortgage, those old credit cards, and that student loan you’re paying off — all of them provide years of evidence that you’re trustworthy when it comes to money.
And your FICO score reflects that time with 15% of your score based on the age of your credit. The higher the average age of your open credit lines, the higher your score tends to be.
So think twice before shutting down an older card or line of credit. If you can keep it open (without shelling out an annual fee), your credit history will be even better.
10. Limit New Credit Applications
Since older cards can boost your score, brand-new cards can have the opposite effect. Applying for a new credit card or loan may cause just a brief dip in your credit score. However, applying for lots of new credit or over a long period of time can have a more significant impact.
Plus, the more new cards you have, the lower your average credit card age. And that lowers your score as well.
What should you do? Apply for new credit strategically — when it makes sense to take out a loan, when you’re ready to transfer a balance to a low-interest card, or when you’re prepared to upgrade to a card with better terms or rewards.
11. Allow Time for Credit Mistakes to Disappear
Maybe you’ve had your share of financial slip-ups. And your credit report highlights them in black and white. But it won’t feature your past mistakes forever.
Given enough time, even your worst credit mistakes eventually fall off your credit report. Late payments will be gone within seven years, as will foreclosures and reports of accounts sent to collections. Bankruptcies stick around the longest, but even those will be wiped off after 10 years.
And the steps you take now will outweigh those old mistakes as you commit to responsible credit habits month after month. Stick with your plan to build or rebuild your credit, and you will see increasing results over time.
Excellent credit doesn’t have to be mysterious or elusive. With the right action steps, anyone can create an excellent credit history, improve their credit score, and step closer to being more confident and in control of their financial future.
Disclaimer: The information provided is for informational purposes only and does not constitute financial or legal advice. Finivi Inc. makes no representations regarding the accuracy or completeness of linked third-party content and assumes no responsibility for any outcomes resulting from its use. External links do not imply endorsement. Please consult a professional before making financial decisions.
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